Mexico’s central bank holds rates, warns wage hikes could hit prices

FILE PHOTO: The logo of Mexico’s Central Bank (Banco de Mexico) is seen at its building in downtown Mexico City, Mexico February 28, 2019. REUTERS/Daniel Becerril/File Photo

May 16, 2019

MEXICO CITY (Reuters) – Mexico’s central bank on Thursday said wage increases have outstripped productivity gains in some sectors, posing risks to inflation and employment, as it held its benchmark interest rate steady.

The Bank of Mexico’s (Banxico) board members voted unanimously to hold the overnight interbank rate at 8.25 percent, the level it has been at since Dec. 20. The rate is presently at its highest level since 2008.

All 15 analysts and economists surveyed in a Reuters poll forecast that Banxico would hold rates.

Mexican President Andres Manuel Lopez Obrador has raised the minimum wage and cut taxes in cities and states along the U.S.-Mexico border in a bid to boost economic growth and deter migration to the United States.

“Given the magnitude of the increases to the minimum wage, in addition to their possible direct impact, there is the risk that these bring about high wage revisions in several sectors,” said the bank in its post-meeting statement.

“In fact, in some sectors these have exceeded productivity gains and could give rise to cost pressures, thus affecting formal employment and helping to keep core inflation at high levels,” Banxico said.

Mexican annual inflation accelerated to a four-month high in April, as consumer prices in Latin America’s No. 2 economy rose by 4.41 percent in the year through April.

Banxico said the balance of risks for economic growth had become more uncertain and continues to be tilted downward, while risks for inflation have an upward bias.

“The latest information suggests that during the first quarter of 2019 the weak performance the Mexican economy had been exhibiting since the previous quarter intensified, due to both external and domestic factors, some of which are transitory,” the bank said.

Mexico’s economy has been sluggish, contracting 0.2 percent during the first quarter from the October-December period, according to preliminary data.